Bankruptcy
What Is Bankruptcy?
Bankruptcy is a legal proceeding in federal
court in which a person with debts (called the debtor) can be freed or
“discharged” from most of them. In a “Chapter 7” bankruptcy, property of the
debtor that is not exempt (protected by law) may be sold. The money from the sale of this property is
divided among the people or companies to whom the debtor owes money (called the
creditors). In a “Chapter 13”
bankruptcy, the debtor is given 3 to 5 years to pay off debts, sometimes at less
than the previously agreed amounts, and the debtor’s property for the most part
remains in the debtor’s possession.
Should I Consider Bankruptcy?
The purpose of bankruptcy is to give someone a fresh financial start. Bankruptcy will work best for people who will
have an income that is adequate to support them and to pay their bills after
bankruptcy. It is usually advisable to wait until you have reached the point
where your financial problems cannot be solved by personal efforts before
filing. In other words, don't file if in
six months your money problems will reappear.
In most instances, debts you get into after you file bankruptcy cannot
be added to the bankruptcy. Before
deciding to file, figure out what your expenses will be after you file and be
sure to allow for some unexpected expenses.
If you will not have enough money to cover your expenses after
bankruptcy, you may want to consider an alternative to bankruptcy.
Automatic “Stay”
As soon as a petition in bankruptcy is filed,
other legal actions against the creditor may be temporarily stopped, this is
called a “stay of execution.” or
“automatic stay” This includes foreclosures, debt collection actions,
garnishments and repossessions as well as administrative actions and arbitration
proceedings. If you have had a previous bankruptcy in the previous 12 months,
the automatic stay may be limited or non-existent. Also, a creditor can ask the Bankruptcy
Court to lift the stay. And if too many bankruptcies are filed but not
finished, a creditor may ask that the debtor be barred from filing for a time.
Can I Get Rid of All My Debts?
Not
always. A
bankruptcy generally will not rid
you of debts for child support, alimony,
most any debt from a divorce, fines, taxes, and many student loans, as well
as, debts incurred by fraud or malicious injury. Under some circumstances a debtor can be
denied discharge of all his debts as opposed to certain specific debts. If this happens the primary reason for filing
bankruptcy is defeated.
Are There Credit Service Organizations That Will Help Me
Avoid Bankruptcy?
Yes.
Does Bankruptcy Hurt My Credit Rating?
Bankruptcy does not always make it impossible to
get credit, but it usually makes it much harder. The fact that you have filed bankruptcy may
stay on your credit rating for several years.
On the other hand, foreclosures and garnishments hurt credit as
well. If you think you need credit after
bankruptcy to buy a home, car or other large items, you may have to rebuild
your credit history from the beginning. Sometimes credit is actually easier to obtain
after bankruptcy, provided you are employed, because you are relieved of most,
if not all, of your debts. But beware of
getting deep into debt again after you file for bankruptcy because in most Chapter
7 cases you cannot file Chapter 7 again for eight years. Chapter 13 bankruptcy can be filed as soon as
the last bankruptcy is finished but you will not get a discharge of the debt if
it has been two years from the last Chapter 13 Bankruptcy discharged or four years
from the last Chapter 7 Bankruptcy discharged.
What Property Can I Keep?
Under most circumstances, the following property
is exempt from being taken by the Bankruptcy Court. (More exemptions are listed
in the Utah Code.)
·
The equity in your house or mobile home
up to $20,000 if it is your primary personal residence (plus another $20,000 if
the property is jointly owned) not to exceed $40,000
·
All wearing apparel, but not jewelry or
furs
·
Certain furnishings and other household
items
·
Professional books or tools needed for
your trade up to $3,500
·
A motor vehicle with a value not
exceeding $2,500
In the case where exempt property has been
pledged as collateral for a loan (called a secured debt), the secured creditor
will get the property back unless the debt is reaffirmed. For example, if you were loaned money to
purchase a mobile home, the agreement you sign usually gives the seller the
right to take the item back if you miss payments. This is a secured debt.
How Much Does It Cost To File?
The court's filing fee ranges from $274 to $299
depending on the type of bankruptcy you are filing. (You cannot avoid paying the filing fee by
claiming poverty.) Husband and wife should file on the same Petition. Attorney fees depend on the complexity of the
case and the attorney, although it is often the case that attorneys’ fees for
Chapter 7 bankruptcies are lower than for Chapter 13. Self-help bankruptcy
forms are available (for a fee) from some websites and stationery stores. The
U.S. Bankruptcy Court cannot provide
you with forms, nor can ULS. However, a
Fee Waiver form is now available at www.utb.uscourts.gov.
You are also required to complete a pre-filing counseling class which may cost
approximately $50.00. You may ask to
have this cost waived as well.
What is a Chapter 13 Bankruptcy?
The Chapter 13 Plan or "Wage Earner
Plan" is another type of case you can file in Bankruptcy Court. Under a
Chapter 13 plan, you make monthly payments through the Bankruptcy Court trustee
to your creditors. The plan usually runs
over a three to five-year period and in most circumstances you do not have to
pay your unsecured creditors in full to be discharged from the debts. An unsecured creditor is a creditor to whom
you have not given any particular collateral or security interest in a specific
piece of property. A Chapter 13 plan
will usually be approved by the Bankruptcy Judge if the Judge finds you filed
the Plan in "good faith" and that you earn enough money each month to
make your planned payments after paying your living expenses. Under Chapter 13, you can usually keep both
exempt and nonexempt property, including your home, though there are
restrictions on keeping unpaid luxury items.
Chapter 13 also has other benefits compared to
Chapter 7. First, the automatic stay (see page 1) applies to co-debtors too,
even if the co-debtor is not filing bankruptcy. For instance, if you had a
parent co-sign for the purchase of a car, filing Chapter 13 prevents the creditor from going after your
parent while the bankruptcy is open. Additionally, some debts that cannot be
discharged in a Chapter 7 bankruptcy can be discharged by Chapter 13. (But no
bankruptcy can discharge alimony and child support, student loans, damages
awarded for DUI offenses, or criminal restitution.)
Preventing Bankruptcy Discharge of Debt payments to be
Ordered in Divorce Decrees
If the opposing party to your divorce action is
ordered to pay debts by the divorce court, the opposing party may try to avoid
actually making the debt payments by declaring bankruptcy. If the opposing party has the debts
discharged by a bankruptcy court, the creditors can still collect on certain
debts from you. The way in which the
decree of divorce is written can reduce the likelihood of the bankruptcy court
discharging the debts.
Even if you do not label debt payments by an
opposing party as anything other than debts, a bankruptcy court could still
decide not to discharge the debts. The
court will make an independent evaluation for each debt in order to determine
whether or not the debt should be discharged.
The court will look at the reason the debt was incurred and what the
intent of the divorce court was in ordering the opposing party to pay the
debts. You can improve the likelihood that the bankruptcy court will not
discharge debts if you provide some guidance or "intent" by labeling
the debt payments as either alimony or support in your divorce decree.
Labeling a debt as alimony shows a bankruptcy
court that the divorce court considered the debt payment as part of an overall
alimony award. Alimony is not
dischargeable in bankruptcy. The
bankruptcy court will still make an independent assessment as to whether or not
the debt payment really is alimony, but calling the debt payment alimony in the
final order will make it more likely that the debt payment will be seen as
alimony. However, before asking that the divorce court order debt payment to be
alimony, you should consider any potential problems with having debt payments be
alimony. First, the opposing party does
not have to pay alimony if you cohabit, remarry or die. Thus, if you cohabited, remarry or die after
your divorce, the obligation for the opposing party to pay the debts could
cease. Second, the person receiving
alimony pays income taxes on the alimony and the person paying does not have
to. If the opposing party in your
divorce pays a large number of debts, you may end up paying income taxes on the
amount of money paid, without receiving any actual increase in your income that
would help you pay those taxes.
Labeling a debt as child support shows a
bankruptcy court that the divorce court considered the debt payment as part of
an overall child support award. Child
support is not dischargeable in bankruptcy.
Therefore, you increase the likelihood that the bankruptcy court will
not allow the opposing party to discharge the debts.
However, child support usually only has to be
paid until the youngest child living with you turns 18 (unless the court orders
otherwise). If your youngest child will
turn 18 prior to the time calculated for the opposing party to pay off the
debts, the opposing party's obligation could cease.
Important
This document is only a general statement of
your rights and responsibilities. The
law is complex and always changing. If
you need specific legal advice, see a lawyer.
Many bankruptcy attorneys advertise in the newspaper, the yellow pages
of the telephone directory, and on the internet. Utah Legal Services cannot
assist you with a bankruptcy nor answer your questions. If you are thinking of possibly filing
Bankruptcy, start saving your pay stubs, bank statements, bills, and other notices
from creditors. You will need this information to file.